On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(a) In General- In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.
(b) Obligations Described- For purposes of this subsection, obligations described in this subsection are obligations which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients.

Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October. Here are some typical reactions of the two types.

From John Avlon at the Daily Beast we have:

But even Speaker John Boehner realizes that the 50 or so radicals on the far right of his own party—the Bachmann, Broun, Gohmert and King crew—are the greatest impediment to responsible self-government right now.

That’s why the new responsible Republican proposal, which passed the House Thursday by a vote of 221-207, could be the best way to defuse the debt ceiling from its most destructive impact. . . .

So the Full Faith and Credit Act should be a no-brainer. But the Obama administration is opposing the measure, releasing a Statement of Administration from the Office of Management and Budget that stated H.R. 807 would “result in Congress refusing to pay obligations it has already agreed to … this bill would threaten the full faith and credit of the United States … this legislation is unwise, unworkable, and unacceptably risky.”

And here’s one from Travis Waldron at Think Progress:

But such a plan makes it clear that the U.S. will meet only some of its obligations, leaving many Americans, including troops, veterans, and the elderly, out in the cold. . . .

Worse yet, the Republican plan doesn’t allow the nation to avoid default. If the U.S. services its debt payments but still misses others, it is still defaulting on payments it is required to make. Since the bill only allows Treasury to make payments as it receives revenues, and the bulk of its payments are made at the beginning of the month even though revenues don’t come in until later, it would almost certainly be unable to meet at least some of its obligations.

When the GOP has considered similar plans before, Treasury officials have called it “unworkable.” Bipartisan analysts said it was “essentially impossible.” Failing to fulfill spending obligations would be “the first step to becoming a banana republic,” a Bush-era Treasury official said. Instead of inspiring confidence among investors, bondholders, and the American people, the legislation would zap it.

Far from preventing default, the Full Faith and Credit Act would essentially ensure it. That wouldn’t just put paying China ahead of senior citizens and members of the military — it would also hammer economic growth both in the United States and across the world. (HTHuffington Post)

Calling this a “responsible” bill as the Daily Beast did is outrageous, and, of course, Waldron is quite right to point out that the bill is fundamentally irresponsible because if it were to pass and nothing more was done it would still not avoid a default inflicted by Republicans who refuse to raise the debt ceiling for the sake of hostage-taking. Nevertheless, even though I agree with Waldron and the President that the bill is irresponsible, I also think that the Democratic Senate should jump on the opportunity provided by the Republicans and pass it forthwith without Amendment, and that the President should sign it immediately, as part of a larger plan to take the debt ceiling off the table in all future negotiations. Here’s the plan.

Budget projections show that if the Bill is passed, then the Treasury would have the authority it needs to meet the majority of its projected deficit obligations and would lack only about $170 Billion in Fiscal 2014 to meet them all. Let’s look at CBO’s budget projection.

Total Revenues for the Treasury in 2014 are projected at $3.0 Trillion. Total Outlays are expected to be $3.6 Trillion. That’s a deficit of roughly $.6 Trillion, or $600 Billion. CBO projects net interest on debt owned by the public of $243 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $468 Billion, leaving a gap of about $130 Billion which Treasury can’t cover with debt instruments.

So, what can Treasury and the President do to meet its remaining obligations? The answer is that it can use Platinum Coin Seigniorage (PCS), an approach the Administration rejected in January of 2013 before the latest compromise with the Republicans allowing debt financing while temporarily suspending the debt ceiling. In January, the dominant proposal making the rounds in the blogosphere was that the Administration use a few Trillion Dollar Coins to defuse the crisis. I didn’t favor that, but preferred and still prefer a “shock and awe” $60 Trillion PCS strategy that would end austerity politics forever, if the President had the desire and the will to do that.

The President doesn’t have the desire and the will, or he would already have filled the public purse in this way. Assuming he still feels that he doesn’t want to end austerity politics, with its terrible effects on poor people and the middle class; but does want to avoid debt ceiling crises in the future, provided the Full Faith and Credit Act is passed without amendment, he can then:

– First, beginning at the start of fiscal 2014, mint platinum coins having face values of $20 Billion per month until the Federal Government is no longer in danger of failing to meet all its obligations. This is about twice the average amount of projected shortfall of $10.8 Billion per month corresponding to the $130 Billion annual shortfall projected. That amount should be enough to cover variations from the average, and also errors in the projection caused by possible recessionary effects due to the sequester and the FICA tax increase in January.

– Second the Government can keep doing this until Congress fully restores the capability of the Treasury to issue debt instruments alongside deficit spending Congress has appropriated. How long this will go on, depends on the Republicans, of course. But even over a year’s time, the amount minted would come nowhere near the Trillion Dollar Coin values the Administration found unpalatable a few months ago. In fact, if the debt ceiling crisis is resolved by year’s end, the amount minted wouldn’t exceed $60 Billion, hardly great enough to roil the international or bond markets, or most people, given the amount of Quantitative Easing (QE) the Fed has already done. If the debt ceiling crisis lasts any longer than that and the financial world gets roiled by the practice, then a) it will certainly prefer the minting of those coins to the alternative of default; and b) they’ll know which party to come down hard on in blaming someone for the continuing crisis.

– Third, at some point in this process, the Republicans will be willing to increase the debt ceiling, but since PCS is being used to avoid shutting down the government or defaulting, their leverage to extract concessions will make the debt ceiling negotiations much easier than they are today. I recommend that the Administration give away nothing to get the debt ceiling raised. It should simply insist on a no-strings attached permanent elimination of the ceiling; while pointing out that the Full Faith and Credit Act, coupled with PCS provides enough flexibility for the Treasury to continue spending appropriations and meet all the nation’s obligations, even if the debt ceiling is never raised.

This may seem to be a very hard line. But in passing the Full Faith and Credit Act, the House has given the Democrats the opportunity to use debt instruments to cover most of the deficit anyway. And PCS gives the Administration the power to cover the rest. So, the Republicans would have a choice of getting rid of the debt ceiling permanently, or allowing the minting of $20 Billion platinum coins at the beginning of every month. If that’s their choice, then I think they’ll get rid of the debt limit, before the President decides to mint a $60 Trillion Dollar coin, don’t you?

Update: CBO just released revisions to its projections for 2013 – 2023. Total Revenues for the Treasury in 2014 are now projected at $3.042 Trillion. Total Outlays are expected to be $3.602 Trillion. That’s a deficit of roughly $.56 Trillion, or $560 Billion. CBO projects net interest on debt owned by the public of $237 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $462 Billion, leaving a gap of about $98 Billion which Treasury can’t cover with debt instruments.

The smaller gap means that it may not be necessary to use $20 Billion platinum coins every month; but only $15 Billion coins to handle variations from the new average shortfall of about $8.2 Billion per month. Of course, if deficits accumulate faster than expected, it would be easy to simply begin minting $20 Billion coins.

(Cross-posted from New Economic Perspectives.)

Jack Foster proposed a framing document for High Value Platinum Coin Seigniorage, in a recent comment he made on one of my posts. In response, I posted a six-part blog series to accommodate readers who prefer the blog format.

Some, however, will want to read or reference a single framing document, rather than six separate posts, and I prefer it in that form myself because it facilitates seeing the whole picture provided by the many and diverse objections to PCS and HVPCS. So I’ve provided one here. I think the full picture provided by the many objections is that of opposition grounded in a fierce unwillingness to change familiar ways of performing Federal deficit spending requiring debt issuance, even though many of those offering objections know very well that the Government is perfectly capable of creating its own high-powered money without selling debt instruments, and even know that all money creation in our financial system is ultimately, if most often indirectly, based on the constitutional authority of the Congress, and its delegation of that authority to other parties.

What can one say about this except that it is mere conservatism and grounded in fear of the unknown at best, or worse, grounded in a desire to continue to benefit from the financial system in one’s own, rather than the public interest? I’m not saying that conservatism is never rational, or that it is unjustified in all cases. But I think my evaluation in the series, and the full framing document indicates that many, and perhaps all of the objections that have been offered to HVPCS reflect a transparent bias to preserve the present system and are relatively easy to turn aside, because they are a stretch reflecting the bias of the people offering the objections.

In any event, that’s my view of the matter, and I leave it to others to read the framing document and to evaluate for themselves, whether the pattern I’m drawing out of the objections makes sense to them. In doing that I hope others will join me in continuing to gather objections to HVPCS I haven’t covered here, and to record these in comments, so that the document may be kept up to date and may become the primary reference for objections and replies to HVPCS. Let’s try to transform this into a crowd-sourced document, so that it becomes a true community document. I’ll be looking forward to your comments and your contributions!

(Cross-posted from Correntewire.)

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the five previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, four, five and this post (Part Six), considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this concluding post, I’ll consider some further political/economic objections to PCS and HVPCS.

Destroys confidence in the dollar, here and abroad because it reveals the reality that our fiat money isn’t “backed” by anything

This one really makes me see red because it reflects 1) the arrogance of the complainer who thinks he or she is fit to know the reality of the fiat money and our present financial system, while the average citizen is not; 2) the attitude of the complainer that it is OK to maintain the platonic “noble lie” that the operation of our fiat money system is different from the way it really works; 3) the very questionable judgment that if everyone knew that US fiat money was just that, then that would destroy confidence in the dollar, even though it’s well-known that all the world’s currencies, including our own are fiat currencies; and 4) the attitudes of the globalizing elites that average citizens shouldn’t know what they’re about. In a word, the anti-democratic character of this objection to HVPCS really creeps me out.

But recognizing that this objection is profoundly anti-democratic also makes it very clear that HVPCS is very much about the larger process of turning back from the evolution toward global plutocracy we see all around us. And it is also about turning back towards both political and social democracy and a decent life for all.

Destroys budgetary discipline

This is another rich one. The idea here is that as long we think we are short of public money, then we will be more disciplined in our spending, and will make sure that the government deficit spending we do approve is only that spending that is necessary for public purpose. On the other hand, if we use HVPCS, then it will be clear that we can have as much money as we choose to have, and so we will lose our fiscal discipline and responsibility, and just spend willy-nilly on foolish things.

Too bad the world and our public spending habits aren’t as simple as this picture suggests. But, they’re just not.

We now have more than 35 years of experience with austerity politics in the sense that powerful groups in the political system have warned about our deficit and debt problems all that time, and have emphasized the importance of evaluating fiscal policy based on its impact on reducing deficits and balancing budgets, rather than the larger economic and social benefits and costs of those policies.

The record during this time shows that the US has increasingly suffered from a profound fiscal irresponsibility in the sense that we have failed to spend what was necessary to achieve larger public purposes like full employment, decreasing inequality, widely distributed gains in standard of living that keep up with productivity, developing a first class educational system, developing alternatives to fossil energy to serve as the new basis of our economy, developing programs to meet the challenges of environmental sustainability and climate change, increasing family integration, and providing first class universal health care to all Americans as a right. So, for more than 35 years now, our politicians have poor mouthed about not being able to afford expanding our domestic social safety net and discretionary programs, while proceeding to spend lavishly on defense industries, and insisting that we can afford that, all while our country more and more develops the social and economic characteristics of a third world nation.

In short, the last 35 years show that placing artificial constraints on the amount of public deficit spending we will do hasn’t worked to produce responsible fiscal policy that fulfills public purpose. I think that’s because when politicians and people focus on indicators like the debt and deficit to guide fiscal policy, instead of focusing on the real impacts of fiscal policy, that opens the way for well-funded elites to obscure issues about those real impacts and focus instead on narrow financial details that the elites understand, because they employ armies of analysts to understand them, while the public has no hope of understanding them, and so is in a very bad position to defend its interests.

So, when we look at the history of politics since Jimmy Carter decided we ought to try to balance the budget, and Alice Rivlin assumed a dominant position in DC thinking about fiscal policy, we can see that practicing artificial scarcity in fiat money creation hasn’t resulted in our becoming more fiscally responsible, but precisely the opposite. We have to acknowledge that we’ve been focusing on the wrong things, and we have to stop using them as a way of evaluating fiscal policy and government spending.

The national debt and reducing deficit spending should have no part in our evaluation of our fiscal responsibility. All that ought to matter is evaluating the real effects of Government spending on the economy, politics, society, culture, our resources, and the environment. That’s the sort of evaluation that should define budgetary discipline.

Budgetary discipline in that sense is unrelated to HVPCS. It has nothing to do with whether we have, or do not have $60 T in the TGA. It has to do instead, with whether we can mobilize ourselves to make Congress and the Executive accountable to our views about public purpose. Right now they are not.

Instead, they are using their austerity narrative as an excuse to weaken rather than strengthen the safety net. They are using it to refuse to legislate Medicare for All, even though polls have shown for many years that 2/3 of the population wants Medicare for All. They are using it to refuse to enable full employment, including a Job Guarantee for everyone who wants to work full time. They are using it to refuse to make available the funding we need to create a first class educational system. They are using it to refuse to fund sorely needed infrastructure repair and modernization. I can go on and on. But the main point is that the present system of funding Federal deficit spending isn’t working to fulfill our public purposes.

It’s time to change that system and to have the change reflect the truth that there can be no shortage of money in our system, only shortages of resources, labor, skills, know how, and well-being. The budgetary discipline we ought to pursue is the discipline of ending the real shortages we have, by using the money we can generate in whatever quantity we need to implement government programs that will help us end these other, real, shortages.

Causes the Government bureaucracy to expand and crowd out private sector activities

HVPCS is itself unrelated to the size of government compared to the size of the private sector. We can have HVPCS, use it to pay off the national debt, use it to cover deficits for many years to come, and still choose to have a lower percentage of economic activity performed by government rather than the private sector. Even if we run large deficits, covered by HVPCS, those deficits can be devoted to shoring up private sector growth rather than government growth. Whether we do this or not is our choice, and either shrinking the Government, or growing the Government is compatible with HVPCS.

Having said the above, that doesn’t mean that we should decrease the relative size of the government compared to the private economy. In recent years, we have shrunk the government bureaucracy substantially as a percentage of employment. That shrinkage has not led to good times or private sector growth. It has led to the opposite.

The privatization of a lot of government work since the 1970s hasn’t led to a reduction in the costs of funding the activities that used to be performed by civil servants. Instead, it’s clearly increased those costs. Contracting out was supposed to be cheaper, because the government would avoid expensive fringe benefits, including retirement costs, and supposedly would reduce the cost of services through competition. However, this theory has proven to be incorrect. Civil servants are cheaper than contractors, and they perform as well or better than contract workers, perhaps, because they have little incentive to drag out and prolong work to ensure that they will be employed in the future.

In addition, there is no correlation over time in the United States between prosperity, economic growth, and a smaller Federal government. If anything the correlation is negative. There were better times, lower unemployment, and faster growth from the end of WWII through 1980 when the Government’s percentage of the economy was higher than it has been during the period from 1981 to the present. So, maybe we could benefit from some more “crowding out” of the private sector by Government than we now have; but whether we would benefit from this or not, the issue of relative size of the government isn’t directly related to whether HVPCS is used or not.

Conclusions

Here are my conclusions based on this six part examination of HVPCS, including all the current objections I could find to the Executive Branch using it to fill the public purse.

• Using HVPCS would demonstrate to the public that: the Federal Government’s budget isn’t like their budget; the Federal Government can never run out of money if it doesn’t choose to; there is no need to cut either revenue or spending because we must reduce the deficit; we can use revenues from HVPCS to pay off the national debt as it falls due, and there isn’t any need to pursue the current agenda of austerity and “shared sacrifice.” There is just no need for austerity and we ought to quit wasting time and causing harm by either discussing it or implementing it. Take it off the table!

• So, HVPCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.

• HVPCS strikes at the domination of the global financial and political system by Wall Street and the big banks. They will do everything they can to remove the power to use it from the President and the Treasury. That is why HVPCS must be used by the President ASAP! He has the main chance to bring change now. He should take it!

• Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose.

• High Value Platinum Coin Seigniorage using coins having $30 Trillion or greater value is most probably a legal alternative for the Treasury to use to fill the public purse. I say most probably, because no one can tell what will happen in response to a Court challenge. However, the likelihood is that the court will not grant standing to any challenger. Even it does, the odds are with the Executive Branch due to the clear language of the coin seigniorage legislation, the relationships between the Fed and the Treasury specified in the Federal Reserve Act, and the unitary executive doctrine.

• There are a host of other economic, political, institutional, and political/economic objections to using HVPCS, they range from dismissing it as “weird,” “crazy,” etc. scary to most people, characterizing it as “printing money” and “inflationary,” projecting a political firestorm and projecting political paralysis in Congress if PCS is used at all, worrying about letting the Republicans off the hook for their irresponsible behavior in causing repeated fiscal crises, worrying about appearing to act like a “banana republic,” worrying about the possibility that HVPCS will elicit “black swans” with terrible unanticipated consequences, warning that using HVPCS will violate “a social norm,” projecting a collapse of investor confidence in the US and its currency and loss of reserve currency status, projecting rising interest rates from the bond traders, warning that HVPCS shouldn’t be used because of the maxim “first do no harm,” warning that minting a platinum coin is the first cousin of defaulting on the debt, because the act will convince financial markets that we can’t manage our affairs, warning that using HVPCS will compromise the independence of the Federal Reserve, and the related objection that it would destroy the institutional structure of the financial system. warning that it would destroy confidence in the dollar because it will reveal the reality that our money is “unbacked” fiat, warning that it would destroy budgetary discipline, and that it would cause “crowding out” of the private sector by the government bureaucracy.

  Looking at this list of objections and the replies I’ve offered in this series, I suggest that every one them, with the possible exception of the inflation objection is insignificant compared to the likely benefits of using HVPCS in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments.

  Even the relatively light austerity being practiced thus far is costing the United States $3.4 Trillion per year in GDP and is leaving more than 30 million dis-employed. If the coming round of austerity from the Congress and the President materializes in the next few months, and we experience another recession, we may end up losing another $1 Trillion off GDP, along with another few million dis-employed.

  So, lifting the burden of austerity politics on the 99%, and ending debt ceiling crises, sequesters, and ideological budgetary conflicts, and their attendant effects on economic activity and unemployment, far outweighs the likely negative consequences of any or all of the rest of the objections against HVPCS, apart from demand-pull inflation, which, I’ve argued, is a very unlikely outcome of HVPCS.

  In this series, I’ve tried to show that there isn’t a good reason in the world not to use HVPCS. Of course, one can’t prove a negative, so I really haven’t shown that. But I hope I’ve shown that it’s costing far too much to continue down the road of debt issuance, in the context of the many objections I’ve reviewed.

  The important cost of doing what we have been doing, is not really the interest on the debt itself; that’s only fiat currency which the Government can always make. it’s the political consequences of the national debt, which are bipartisan action to practice austerity and “shared sacrifice,” that really count. We need to get rid of this before it destroys everything we hold dear. The way to do that is to use HVPCS to get of rid of debt and cover government deficits for many years. HVPCS is a way out of the trap we’ve built for ourselves. We need to get on with it, now!

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is the sixth and concluding part of that document. I’ll make available the whole document shortly.)

(Cross-posted from New Economic Perspectives.)

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the four previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, and four, and this post (Part Five), and the remaining post in this series considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some objections to PCS and HVPCS based on their predicted institutional impact.

The platinum coin is “the first cousin of defaulting on our debt”

This objection is from Ezra Klein; he says:

. . . It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.

The “banana republic” stuff is just name-calling. What does using HVPCS, which is authorized by legislation passed in 1996, have to do with being a banana republic? Sure, we’ve never used HVPCS before to pay down debt and cover deficit spending, but why is it not a superior way to do these things than issuing debt instruments, which require us to deal with bond markets and to provide risk-free interest payments mostly to wealthy elites and foreign nations? It seems to me that it is that method of financing that is much more consistent with the methods used by the Latin American banana republics in the 20th century than HVPCS would be.

And why is the platinum coin the first cousin of defaulting on the debt? Ezra Klein says that it proves to the financial markets that we can’t be trusted to manage our economic affairs in a rational and predictable way. But why would it prove that?

It would prove that we’ve changed our way of paying off debt instruments and deficit spending alright; but that doesn’t mean that our new way of doing things wouldn’t be predictable and rational, and that financial markets wouldn’t know exactly what we were going to do. They’d know, for example, that the US wouldn’t be rolling any more debt by issuing new debt instruments, even though they may not like that as well as they like what we’re doing right now. They’d also know that with austerity off the table; we’d be likely to deficit spend a lot more to create full employment here, which they might guess would also be good for their flagging export-based economies.

As for our borrowing costs rising; just how does Ezra Klein suppose that would happen since 1) we’d use HVPCS to end sales of debt instruments altogether; and 2) our interest rates on still outstanding debt are mostly fixed, except for the relatively small volume of bonds that are inflation-protected?

This last notion of Ezra Klein’s makes two things clear. First, he’s fixated on using Trillion Dollar Coins or less; and has never thought through the implications of using a $60 T coin, having freaked out over the small-ball TDC proposal. And second, he hasn’t yet figured out that our bond interest rates can only go up if the Federal Reserve raises the Federal Funds Rate which it, and it alone, controls. He still thinks that the bond vigilantes and their “confidence” in US bonds determines our interest rates.

Compromises the independence of the Federal Reserve

That’s true. But, the vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large. I am all for the President ordering the Secretary of the Treasury to use HVPCS, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone has the authority to issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.

Destroying the institutional structure of the financial system

I don’t know about its destroying the institutional structure of the system; but I will point to a few critical impacts I think HVPCS is likely to have. First, as Warren Mosler has pointed out in his characteristically pithy way,

“And all the coin does is shift interest expense from the Treasury to the Fed. . . “

This is Warren’s assessment of the financial system impact. But, second, an HVPCS coin would have a critical impact politically, because as I have pointed out time and again, it would end austerity politics for good, because it would end the debate over the national debt.

Third, it would make Treasury financing operations much more transparent than they are now. “The secrets of the temple” would be much more out in the open. That’s important, because right now the Federal Reserve and the banks escape accountability, since the American people don’t understand their role.

Fourth, the Federal Reserve Banks would have to pay IOR to maintain their target Federal Funds Rate. From the viewpoint of the public, that kind of operation would look like the bank savings accounts that people are familiar with. The Fed holds reserves and pays depositors an interest rate. Right now, when the Treasury pays interest on securities, that looks like debt to the public, not like the savings accounts that security accounts are like functionally. So, IOR replacing securities in response to HVPCS would greatly improve the political optics of government financing deficit spending.

And fifth, John Lounsbury makes this important point:

The reason Mosler’s one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.

A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government to pay interest to private institutions to finance operations would be no more.

That might well be beginning of the end for today’s institutional structure of the financial system. And I have to confess that after the many banking fiascos of the past 30 years, I can’t view that as a bad thing for either this country, or the rest of the world.

But that’s just me; maybe Ezra Klein has a different opinion?

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the three previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, and three, this post (Part Four), and the two remaining posts in this series consider still more objections brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some political/economic objections to PCS.

An HVPCS coin is a less acceptable option than a TDC or HVCS coin

Less acceptable to who? Certainly, HVPCS would be less acceptable to the FIRE sector than other PCS options. But the truth is that all PCS options would be unacceptable to them. They will scream hysterically if any PCS option is used; and then will raise huge amounts of money, and work as hard as they can to repeal PCS legislation. So, what’s the difference whether an HVPCS, TDC, or HVCS approach to PCS is used? Why do we care about how they will react?

The important question is how most people will react; not how special interests will. And people will react much more favorably to PCS, if enough money is minted to fill the public purse, change the game, and solve their perceived debt/deficit problem, than will react if only enough is minted to avoid the debt ceiling, or to fund specific programs with relatively small amounts of seigniorage. That’s why HVPCS is actually a much more acceptable option than either of the other two.

An HVPCS coin would bring on “Black Swans”

The argument here is that any new significant thing that we do, will have unintended consequences; and that some of them will be “black swans.” Nassim Nicholas Taleb says (pp. xvii – xviii) that a “Black Swan” is an event with three attributes:

It is an outlier . . .” in the sense that it is “outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. . . it carries an extreme impact . . . human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Keeping this definition in mind, perhaps beowulf’s formulation of the PCS option might be considered a black swan; though Ellen Brown had envisioned the possibility of a TDC in her 2007 book, before beowulf advocated it, but without framing it in the context of existing legislation. That might make PCS more a “white swan,” an unexpected event we might have been able to anticipate. However, even if PCS itself is a black, white or “gray swan,” it’s much harder to contend, even with the most open-minded thinking about it, that it’s potential consequences are likely to include events “. . . outside the realm of regular expectations.”

Looking at the various objections we’re surveying here, they include a wide range of unintended consequences, and we are anticipating them, discussing them, evaluating the likelihood of the various possibilities. Black Swans can always arise, and we need to prepare for them as best we can. But that preparation can’t include avoiding new innovations that promise to help us solve serious problems that are visiting very heave social and economic costs on much of out population. But, instead, it ought to include measures we can take to adjust and correct for risks that are known and even unknown.

I think that deficit spending using HVPCS, comes with various fail-safes we can use if things begin to develop chaotically. One of them, perhaps the most fundamental, is that we can simply stop using the seigniorage in the TGA, and start issuing securities again. Even if we did that, by then we’d be a better position relative to the perceived threat from the debt, we’ve been hearing about everyday. Another, is that the Federal Reserve can pay Interest on Reserves (IOR), as it is doing now.

Yet another, is that we can monitor the effects of seigniorage spending carefully, to track the changes occurring in the financial institutional structure caused by seigniorage in itself. Finally, we can use taxation to cool off any overheating of the economy due to seigniorage spending.

In short, with the various alternatives for adjustment we have available, if necessary, and very careful monitoring of effects, I think that fear of the inevitable unintended consequences of using seigniorage should not deter us from using it to attempt to solve the political problem of the national debt and end austerity. To suggest otherwise, is to mistake the “black swan” for a conservative bogeyman. But then again, perhaps that’s what Nassim Nicholas Taleb intended all along.

Inflation

Won’t creating all this money by using PCS to repay debt and perform deficit spending without issuing any new debt be inflationary? In a word, no!

The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren’t immediately spent. So, they don’t all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. To gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy.

Roughly $6.5 Trillion in debt subject to the limit was owed by the Treasury to other agencies or to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn’t be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.

Next, the 10 T or so of debt held by private corporations, individuals, and foreign governments would only be paid as it falls due. Much of it would be paid over the first three years. But, the additional reserves placed in the system by paying the debt, and not issuing new debt instruments would be less inflationary than rolling over bonds would be.

Also, their presence in the banking system, would clearly flood it with reserves and drive overnight interest rates down to zero, rather than raising them. For the Fed to hit any non-zero rate targets it would have to support them by paying IOR, to drain the excess reserves. So, there’s no inflationary impact from repaying debt instruments as they fall due by adding reserves to the banking system.

That leaves deficit spending. In the case of a $60 T coin, and a national debt of $16.4 Trillion, we’ll assume that $43.6 Trillion would be left in the TGA for future deficit spending. However, the fact that the credits are in the TGA doesn’t mean that the Treasury could spend them. In fact, it can only spend them if Congress appropriates deficit spending. So, the bottom line is that the $43.6 T doesn’t go into the economy until it’s appropriated. Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn’t, then there won’t be demand-pull inflation. And, if it does, then the inflation will be due to unwise Congressional appropriations and not to using PCS.

In short, there’s no way that PCS in itself can have an inflationary impact, no matter how high the value of the platinum coin is. That’s because repayment of already held debt is less inflationary than continuous rollover, and gradual increase, of debt. Repayment of debt to government agencies including the Fed doesn’t enter the economy, and using PCS-generated funds to cover deficits is not in itself inflationary, unless deficit spending is so large that it continues past the point of full employment.

”First Do No Harm”

“First, Do No Harm,” is a great maxim; but when excessive caution and delay have the very high costs we see in our economy; then we have to weigh those already experienced and continuing costs of not minting a $60 T or other HVPC, and also the risk that the capability to use HVPCS may be repealed, against the potential cost and very low likelihood of inflation resulting from using it to fill the public purse, and then only to pay down the national debt and cover Congressional deficit appropriations. As I’ve already argued, there’s no causal transmission mechanism directly from PCS-based spending to demand-pull inflation. And demand-pull inflation is by far the consequence of HVPCS that people fear most.

It would shake investor confidence in the US

Some skeptics warn that using a $60 T coin would shake investor confidence in the United States lead to the dollar’s replacement as the reserve currency, and might and cause the de-evaluation of the dollar in international exchanges. I’m very skeptical about this possible scenario. First, the $60 T coin proceeds would first be used to pay off intragovernmental and Fed debt. This can have little effect on the non-government economy because nothing goes into it as a result of this pay off. Also, the outstanding public debt would suddenly be down by 40%, guaranteeing that would be no more debt ceiling crises in the US for some time. I can’t see how this would do anything but increase confidence.

Second, when the seigniorage is used for deficit spending, the immediate effect of that would be to supply no more securities to the market and to create the expectation that supply would be limited in the future. That can only increase demand for the securities still outstanding, increasing their desirability.

Third, during the first year after HVPCS is used another $1.7 T in short-term debt would be paid off, at least. That too, would increase demand for the remaining securities in the market place. As for the swap of $1.7 T in reserves for the securities, I’ve already argued earlier, that the reserves may be less inflationary than securities, which means that the swap might well be mildly deflationary. But whether it is, or is just a swap with little inflationary impact; it’s hard to see why this would effect the value of USD in international trade.

On the reserve currency business, I don’t think there will be any impact on that status as a result of using the coin, because, again, there will be no inflation resulting from it. But let’s say people panicked and replaced USD as the reserve currency. Then 1) our exports would increase and unemployment here would decline; and 2) our military interventionism in foreign policy would take a hit; because fighting wars overseas would be much more expensive due to the decreased value of USDs. Seems to me both of those things are good for us.

If we mint the $60 T then we will “freak out” bond traders since we’re “flipping them the bird.”

Well, all I have to say about this one, is that it’s probably true. After all, anyone would “freak out” if the primary source of supply for their business was threatened. But what I don’t understand about this complaint is why the President and the rest of us ought to worry about it. After all, the bond traders don’t worry about us, or the 31 million people who are now dis-employed, do they?

So, if the bond traders are mad at the US, then can they do about it? They can’t drive up the interest rates on bonds already sold, and they can’t force the United States to sell any more debt instruments if the Treasury doesn’t want to. Maybe they can get the Fed to pay a higher IOR rate. But that will have minimal effects on our politics.

In my next post, I’ll discuss objections to HVPCS based on institutional impacts

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

As I pointed out in Part Two of this series, there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time eventually building up to a TDC.

Part two, this post (Part Three), and the three remaining posts in this series consider the many objections brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS have already thrown everything but the proverbial kitchen sink at it. In this post, I’ll consider some political objections to PCS.

The Executive will never do it because it’s too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. Also, it’s too big to be practical.

Mostly, this kind of characterization is just name-calling and labeling and is really beneath contempt. A big problem exists. That problem is austerity politics and it is blocking the emergence of progressive economic policy during a time when the presence of nearly 31 million dis-employed people, unprecedented inequality, a stagnating economy, and many other serious challenges requiring an activist Federal government to enable solutions. This is what is too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. This is what is profoundly impractical; not minting an HVPC of whatever face value to fill the public purse so we can pay off the debt and cover deficit spending for years to come.

HVPCS can provide the fiscal background that will open the way to constructive economic policies. HVPCS is a novel solution in the sense that it has never been used before. But that doesn’t make it crazy, weird, bizarre, or outré. It just makes it “new.”

Fearful, or conservative people will frequently characterize new initiatives in uncomplimentary ways; but their real objection is that the new proposal is outside of their comfort zone; and they believe in as little change as possible because they think that change is most often bad and rarely, if ever, a good thing. From their point of view, this is the best of all possible worlds, however evil it may be for the majority of people.

There’s no point to creating a Strategic Petroleum Reserve-like buffer stock of something the govt has the ability to create at will, especially if it’s just going to scare the hell out of people

This is an objection offered by those who prefer an incremental approach to PCS, rather than HVPCS with its consequence that enough seigniorage would be generated to pay off the national debt and cover deficit spending for many years to come. They emphasize the importance of making people comfortable with the idea of PCS before we use it to really change the situation of fiscal politics and move it away from austerity.

Making people comfortable and moving toward consensus is a laudable goal. But PCS will immediately be perceived as a threat to powerful vested interests (as I’ll explain below). These interests won’t allow the Treasury Department to have the power to create electronic credits in the Treasury’s spending account for very long. They will vigorously pursue repeal of the 1996 law to constrain Treasury once again to taxing or borrowing in order to fill the public purse. That’s why we do need a buffer stock of funds in the Treasury General Account (TGA) whether or not it scares people.

In addition, just what does “scaring people” people mean? Scaring bond traders? Scaring Wall Street? Scaring the big banks? Scaring the media who have gotten in bed with these interests? Scaring the people who have devoted their lives to propagandizing for austerity? Or does it mean scaring “average” Americans?

I don’t think it means scaring most people, because I think they will be comforted to know that the Treasury has enough funds to pay off the public debt as it comes due; and to cover deficit spending appropriated by Congress for many years to come. They will also be comforted to know that there’s no need to cut major popular safety net or discretionary programs, or to raise taxes on them.

Let’s get real! Using HVPCS may scare elites here in the United States and in other nations around the world. But it won’t scare the American people once they understand how it will impact their own lives.

It’s the same as “printing money”!

“Printing money” is an epithet from gold standard days used to characterize paper money that wasn’t convertible to, and thus “backed by” gold. When the US and other nations ended the gold standard in 1971, all money became fiat money, unbacked by convertibility into any commodity. So, today, when people refer to “printing money” they usually mean the Government issuing currency or bank reserves while deficit spending, without also issuing debt instruments of equal face value to withdraw an equal amount of money from the economy. When debt is sold along with new money created in deficit spending, this is often viewed as “debt-backed” money, and is also thought to be less inflationary than deficit spending unaccompanied by new government debt.

The objection to using PCS then, is precisely that it would provide the credits needed to add new money into the economy without issuing debt, and the basis of the objection is that this is more inflationary than adding the same money into the economy after subtracting an equal amount from it by selling debt. In turn, the idea that PCS-based deficit spending and debt pay off would be more inflationary than debt-based spending is based on the Quantity Theory of Money (QTM). The problem is that the QTM is false, and that both logical analysis of the theory and the empirical evidence available to us refute it.

I’ll discuss this a little more below under the inflation objection. But the main point here is that there’s no reason to believe that PCS-based deficit spending or debt repayment would be more inflationary than deficit spending or debt repayment accompanied by debt issuance. So, there’s nothing to the “printing money” objection. The US isn’t either Zimbabwe, or Weimar. It doesn’t have crippling external debts in currencies it does not create; or wholesale destruction or appropriation of its productive capacities to contend with. So, PCS won’t lead to our becoming like either of those historical basket cases.

The political blowback will be fierce, and minting the coin will strengthen the extremist faction in the Republican Party and lead to paralysis in the Congress.

Minting a platinum coin with any appreciable face value over $1 Billion Dollars will create a political firestorm. It doesn’t matter if the face value is $100 Billion or $100 Trillion, the act of using PCS, including HVPCS, will be met with outrage, propaganda, labeling, name-calling, and predictions about the decline and fall of the United States. The extremist faction of the Republican Party will have a field day and will be fully supported in their outrage by Wall Street, the big banks, and the financial and political MSM.

However, it won’t lead to political paralysis in Congress, provided HVPCS is used rather than “moderate” PCS options. If $60 T gets credited to the TGA, and the President pays down $6.5 T in intragovernmental debt, during the first week after minting the coin, then the Congress will be faced with a game-changing fiscal backdrop to deal with. The President can advocate for action on a variety of measures that will meet national problems with no questions about the fiscal capacity to accomplish these things. If the Republicans simply refuse to pass them, or to work through compromises without having the excuse that we must balance the budget, reduce the deficit, or repay debt because we are running out of money; then they will suffer severe losses in 2014, and the President will get what he wants in 2015.

It really is as simple as that. Without being able to “poor mouth” the country, the Republicans will have no rationalization for their obstructive fiscal politics, and the President will have no excuse for cutting programs people need and want. If the extremist Republicans continue on with their normal economic nonsense, then they will be dead men/women walking as we approach the next election. The 80 CEOs and their “fix the debt” stuff, as well as Peter G. Peterson will also be gone, as political factors. And both parties will have to get about the business of solving our nation’s problems, or suffer the consequences in 2014.

The platinum coin will only delay a reckoning we need to have

The “reckoning” here is over the Republicans’ “reckless threat to force the United States into default.” Using either the TDC or HVPCS, lets the Republicans off the hook on this issue and makes the new hot issue the President’s irresponsible action in minting a platinum coin. I think whether this happens or not depends on the face value of the platinum coins involved. If the platinum coin is a $60 T or some other HVPCS alternative, then I think the political system will quickly begin frying bigger fish than either of those issues.

The issue of whether to let Republicans off the hook is small potatoes compared to the issue of whether HVPCS should be used in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments. Both this issue and the issue of whether we should end austerity politics when there’s no longer any need to worry about solvency or debt when deficit spending, are far bigger issues than whether the Republicans were “reckless” or the President “irresponsible.” In addition, the issue of the President’s “irresponsibility” will be gone in a week once he pays off that first $6.5 T in debt subject to the limit.

We can’t mint a platinum coin because this would violate a social norm!

Social and cultural norms are properties of social systems, and there are many levels of social systems ranging from families and small friendship groupings to international social systems. You can certainly say that there’s a norm against using HVPCS as a plausible solution to the national debt, and claim that this is not how our society pays its bills. And, it’s certainly true that we haven’t done it in the past; and that people working for, or identifying with, the FIRE sector are opposed to using PCS as a solution to the debt problem and take refuge in ridiculing us and trying to activate a social norm and frame that they think is dominant.

But these things don’t show that there really is a social norm preventing this in the United States when viewed as a large-scale political/economic system. Or that President Obama has to move incrementally to change “the social norm” because he would have a problem with implementing High Value PCS with a bold lightening strike minting a $60 T coin, since the country as a whole would rise up in opposition to such a move due to the strength of the social norm that we shouldn’t use HVPCS. There’s no evidence at all to suggest that this would be the case, and every reason to believe that most people don’t care how the national debt is paid off; so long as it’s paid off, and is not there to burden themselves, and “their grandchildren.”

After all, most people are completely unaware of how deficit spending and debt instruments work, and completely unaware that “debt is not debt” as we MMTers like to say. What they do know is that the United States has more than $16.4 T in debt instruments out there. That scares them, because they’ve been made to believe that it’s their debt, and I think they really don’t care if this “debt” is paid off by taxing more than we spend, or through using platinum coins to get the Federal Reserve to create money out of thin air for Treasury to use in a way that has no obvious short-term effects on them.

In part four, I’ll discuss more political as well as some economic objections.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

There are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all PCS of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort.

It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time eventually building up to a TDC. The remaining posts in this series consider the many objections brought forward by people in one or more of these categories, and my replies to them. As you will see, the opponents of HVPCS have already thrown everything but the proverbial kitchen sink at it. In this post, I’ll consider some legal objections.

PCS violates the intent of the 1996 legislation, and is an unconstitutional exercise of executive authority, or is an unconstitutional delegation of legislative authority to the executive.

The Courts generally don’t try to interpret laws based on theories about Congressional intent, in the face of the plain language of a law. The language of section (k) of the 1996 legislation is particularly plain in providing for platinum coin seigniorage and leaving face values and other coin attributes up to the Secretary. It is not just that section (k) is plain its meaning; but also that other sections of the law constrain what the secretary can do in various ways. The plain implication of the section (k) textual context is that Congress intended to delegate broad powers of platinum coin seigniorage to the Secretary. There is no contrary evidence to the plain meaning of the text of section (k) in the law.

Some have contended that the purpose of the statute was to legislate about commemorative coins, rather than coins intended as a a source of revenue for the Treasury. Philip Diehl, Director of the US Mint at the time of the legislation drafted the language of the law. He flatly denies that the intent of the law was to authorize more commemorative coins, and says it was to provide new coins that would produce profits for the US Mint. Such coins are unambiguously legal tender. There’s no further evidence that Congress intended anything else in passing the law he drafted.

The Justices aren’t collective psychologists who are expert at divining the intent of the Congress. They are expert, however, at interpreting what the text of a law says, and so that is what they stick to almost all the time. A challenge to PCS based on intent isn’t something any Court is likely to take up, in the face of the language of the 1996 legislation, and Congress’s plain ability to repeal one or more of countless laws that allow unintended consequences.

What if a $60 trillion dollar coin is used to avoid the debt ceiling, and this saves the United States from defaulting on its debts, and the world financial system from collapsing? Is it then likely that the Supreme Court will entertain any challenges to the plain language of the law based on an interpretation of intent, unsupported in the text of the law, which would then place the Treasury in the position of having to return that trillion dollars in Fed credits, and again look default in the face? Can you see John Roberts ever voting for this?

John Carney, a CNBC blogger, has suggested that the 1996 legislation is unconstitutional because it specified an impermissible delegation of the Congressional authority to coin money to the Executive Branch. He argues that there’s no “intelligible principle” behind the language in section (k) limiting the Secretary’s powers.

However, Congress delegated to the Treasury the power to mint platinum bullion and proof coins having a variety of properties to be specified by the Secretary; but it did not delegate to the Secretary that power with respect to coins made out of other materials; or even with respect to platinum coins that are neither bullion or proof coins. So, Congress did limit the authority of the Treasury to mint platinum coins according to intelligible principles. Just not the intelligible principle that the coins involved had to be limited to a specific face value. Or, to put it another way, in the area of platinum coins what Congress has done is to delegate its authority according to “the intelligible principle” that the Secretary is to mint such coins with face values he/she deems necessary and proper.

PCS really doesn’t avoid breaching the debt ceiling

It’s also been suggested that PCS doesn’t solve the debt ceiling problem, because in substance, if not in form, using the platinum coin is just a way of Treasury getting a loan from the Fed until the debt ceiling can be raised and it can go back to issuing debt. This argument assumes, however, that Treasury would have an obligation, at some point, to redeem the coin from the Fed with revenue raised from taxes or debt issuance. However, none of the proponents of using PCS, until very recently, when this idea crept into the writing of Paul Krugman, ever proposed restoring the status quo by buying the coin back from the Fed.

Instead, our main idea has always been that any platinum coins deposited at the Fed would remain in its vault as a Fed asset in perpetuity, and that the Fed would credit the US Mint’s account with the face values of the coins. In our view the Fed would have the legal duty to provide such credits in response to a deposit of a platinum coin or coins because the coins are legal tender, and the NY Fed, as the fiduciary banking agent of the Treasury Department, cannot refuse to accept and credit a legal tender coin. The Treasury would incur no obligation to the Fed in using PCS, any more than any one of us would incur any obligation to our bank in giving them a coin with $100 in total face value, and expecting the bank to credit our account with that $100.

The Fed can’t be forced by Treasury to accept and credit an HVPC it mints

Oh, yes it can. Treasury may choose not to force the Fed to do this, as it just did, but one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. To do that under an arrangement where the Fed is its fiduciary bank/agent, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246, the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242). See this more detailed argument for further development. In Part Three, I’ll consider political objections to using HVPCS.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

How many times have you heard that the Government can only spend money after it raises revenue by either taxing or borrowing? Nearly every time someone talks or writes about the US’s public deficit/debt problem? How come nobody asks why, since Congress has the unlimited authority to create coins and currency, it doesn’t just create money when it deficit spends? The short answer is that Congress in 1913, constrained the Executive Branch from creating currency or bank reserves, delegated its power to do that to the Federal Reserve System, and never looked back when we went off the gold standard in 1971, even though this removed the danger of money-creation outrunning gold reserves, and also created a new monetary system based on fiat currency.

How It Works

But coins, it turns out are different from currency and bank reserves. They’re the province of the Executive. And Congress provided the authority, in legislation passed in 1996, for the US Mint to create one oz. platinum bullion or proof platinum coins with arbitrary fiat face value, having no relationship to the market value of the platinum used in the coins. These coins are legal tender. When the Mint deposits them in its Public Enterprise Fund (PEF) account, the Fed must credit it with the face value of these coins. The difference between the Mint’s costs in producing the coins, and the reserves provided by the Fed is the US Mint’s “coin seigniorage” or profit from the transaction.

The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Fed for profits. These then go into the Treasury General Account (TGA), the spending account of the Treasury, narrowing or eliminating the revenue gap between spending and tax revenues. So, for example, say the Secretary of the Treasury ordered the Director of the Mint to create a $60 Trillion (face value) coin; and deposit it in the PEF account at The NY Federal Reserve Bank. The Fed would credit the PEF with $60 T in reserves, and the Treasury would then “sweep” the seigniorage, nearly $60 T, into its spending account.

Benefits

Platinum coins with huge face values such as $60 T, can produce seigniorage closing the revenue gap and technically end deficit spending, while still retaining the gap between tax revenues and spending that can add to aggregate demand and produce full employment. Platinum Coin Seigniorage (PCS) is also a way for the Executive to end debt ceiling crises, since the profits could be used to repay debt instruments when they fall due, without the need to issue any more debt.

The seigniorage from a $60 T platinum coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely, to understand that the Government’s budget isn’t like their household budget. The presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now, but austerians say we can’t pass because “we can’t afford it.”

If all debt instruments are re-paid by using PCS, then, eventually the US would have no debt subject to the limit, or presence in the bond market, and would pay no interest to bond holders. No one would worry about the public debt, or use its size to justify blocking legislation that fulfills public purpose and promotes the general welfare.

So, PCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.

Why we need to get it done right now!

It must be done now! If it doesn’t, then people who are against the use of PCS will have time to organize against it and get it repealed by the Congress. Now that the PCS capability is widely known, the FIRE Sector will be gunning for it with all the financial, political and propaganda power it can bring to bear. It will do that because using PCS, especially the $30 T or greater coin, High Value Platinum Coin Seigniorage (HVPCS) I propose, strikes at the domination of the financial and political systems by Wall Street and the big banks. Cullen Roche explains why:

The most interesting thing about the coin idea is that the biggest threat of the coin was to the existence of private banking. I am actually surprised that a major bank hasn’t come out very publicly stating that the coin was ridiculous. Why? Because the coin exposes a potentially enormous change in the way the US monetary system functions. Instead of having a money system that is designed almost entirely around private banks (who issue most of the money) the coin threatened to expose the reality that government could self finance if it wanted to. In other words, the government could become the permanent primary issuer of money (as opposed to choosing to use private bank money).

So the Fed’s role is of particular interest here. And we must again ask ourselves. What is the Fed? Is it a public entity or private entity? It’s a bit of both. The Fed is a strange sort of hybrid public/private entity. But the coin decision has to make one wonder where they stand on this issue and whether the Fed has imposed its will on a potentially important debate. Is this merely a case of the Fed being apolitical and independent? Or is this a case of the Fed siding with its true master – the private banking oligopoly? I don’t know, but one thing we know for sure is that the Fed is not merely serving public purpose at all times. After all, its existence as a support feature for an oligopoly that serves private purpose (banks are slaves to their owners) renders the Fed compromised on public purpose to some degree.

So, HVPCS threatens the banks’ domination of the Fed, and also their role in money creation, and with it some of their income. The more time that passes without using HVPCS, the more likely it is that the Executive Branch will lose this capability to Wall Street’s persistent political efforts at repeal, and become the actual, rather than only the pretended (kabuki) prisoner of debt instruments and austerity once again.

Already, some bloggers in the business press who want to use the TDC to avoid the debt ceiling have proposed and expressed support for the idea that the capability to use PCS could be repealed in a swap for repeal of the debt ceiling legislation. This is a very unequal swap, because the power to use PCS, along with the willingness to use it, already makes the debt limit a dead letter.

The only swap that makes any sense is repeal for legislation giving Treasury the same right as the Fed has now, to create money out of thin air, but only for the purpose of repaying debt subject to the limit and covering deficit spending appropriated by the Congress; because this, and only this, is the equivalent of the PCS power. The only thing that would be more preferable than either of those things is to end the “independent,” really big bank and Wall Street dominated, Fed, and make it accountable by placing it under the direct authority of the Executive Branch and the Secretary of the Treasury with the Fed’s current capabilities to create money intact.

Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose. Removal of the capability would require that austerity politics be ended through change in the Congress. That sort of change, however, is years down the road, whereas the President can make HVPCS happen right now.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will deal with objections made to HVPCS and answers to them.)

(Cross-posted from New Economic Perspectives.)

The issue of whether the Fed can really refuse to accept and credit a deposit of a platinum coin with its face value, is being raised frequently on blog posts about Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin (TDC). In the past, I’ve argued that the Fed cannot; and the final decision on taking the TDC off the table was actually made by the President, and not by Chairman Bernanke.

Ellen Brown, the well-known author of The Web of Debt, and also of this recent post on fiat money, direct financing of federal spending, and using platinum coin seigniorage made this comment in a discussion thread at Monetary Realism:

Per the Fed’s website (or maybe it was the Treasury’s), a gas station can reject a $100 bill before the gas has been pumped. You only have to accept legal tender after the service has been rendered or good delivered. The Van Nuys Flyaway won’t take dollar bills. Apparently then the Fed can reject a tender before it has rendered the banking services involved. It’s a privately-owned bank, after all!

Here’s my reply to this comment.

The coin being presented to the Fed isn’t tendered as payment for services, or for a product. It’s a coin being tendered as a deposit into the Treasury General Account (TGA). Also, note these three considerations.

First, the Treasury Department is mandated to deposit its money into Fed accounts if it wants to enter the banking system. So unlike the gas station; the Treasury can’t find another bank; and it needs a bank to spend and implement Congressional appropriations. A Fed regiional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.

Second, even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.

Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.

And third, consider the Board of Governors and the Chairperson of the Fed. What would they do? Well, they’ll tell the Secretary that they don’t want to do it. But if they say no; and the Treasury Secretary orders them to accept and credit the coin; then what? Then this:

12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”

So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242)

And as beowulf has pointed out, the Fed really doesn’t want to go to Court over this because they risk a Supreme Court finding of unconstitutionality due to the Unitary Executive theory, which, in this case, may well have the support of some of the most conservative justices. My own view here, is that the Fed would not even make it to the Court because they’d be denied standing under 12 USC 246, if the Treasury Secretary also ordered them not to contest his order legally.

If you read through the discussion thread where Ellen Brown left her comment, you’ll see that both Philip Diehl, former Director of the US Mint under President Clinton, and Carlos Mucha (beowulf, or beo), the lawyer who first proposed the use of PCS and the TDC, and the author of the blog post, believe that no Secretary would treat the Fed this way. But what if the Secretary were ordered by the President to do it? And what if the President were somebody like FDR or LBJ? Then I think it could happen; and depending on how tough things get in the next few years who knows what Obama will do?

After all he’s the guy with the drones. And the guy who throws people under the bus when he thinks he has to. So, why wouldn’t he throw Bernanke under the bus too, if he thought he needed to? Just sayin’!

(Cross-posted from New Economic Perspectives.)

As part of a wonderful discussion thread on the legal basis for using Platinum Coin Seigniorage (PCS), following a post by beowulf (Carlos Mucha), the first to propose the Trillion Dollar Coin (TDC). Michael Sankowski, one of the founders of the Monetary Realism approach to economics offered a very long reply directed at High Value Platinum Coin Seignorage (HVPCS), and the TDC itself. Mike’s reply is a good example of the many misgivings people have about using PCS with face values in the trillions. Since Mike is a supporter, rather than opponent of PCS and believes that PCS is legal, I thought it would be worthwhile to deconstruct his long comment and show that his downsides are pretty speculative and don’t provide good grounds for supporting incrementalism is using PCS.

Mike begins:

There are huge downsides to printing a high value coin. Like it or not, our current setup requires the buy in of a large number of participants.

I don’t think it does. Using PCS requires only a decision by the President and his willingness to command the Treasury Secretary to do his bidding. In turn, the Secretary must command the Director of the Mint, and also the Chair of the Fed, to play their roles in creating the coin and seeing to it that the Fed credits the face value of the coin to the Public Enterprise Fund (PEF) account at the New York Fed. The fact that the President can command the Secretary is well-known. What’s not so well-known is:

12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal Reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed.

The coin is new. The coin is weird. Even if the effect of the coin is the same – or similar – to quantitative easing, it’s still new and weird for nearly everyone in the United States.

Well, it’s a new use of coinage, sure. That will make it “weird” for some people; not so weird for others. Using the coin forces the Fed to add reserves to the PEF which in turn gives the Treasury the ability to fill the pubic purse with most of the face value a platinum coin. I don’t find that “weird.” I think it’s the way things ought to be done. What purpose is served by using the term “weird” to describe PCS? Is it to discredit the idea because it’s new; or is Mike trying to show that even though he’s a supporter of PCS, he’s still a Very Serious Person (VSP).

Actually minting a very high value platinum coin could easily disrupt markets, it could easily freak out the larger investment community. This proposal is totally out of left field – heck the mainstream is only now thinking about the coin. We’ve had a few years over here at MR and in the MMT community to think through the pros/cons, and I bet we still haven’t covered many of those pros and cons.

First, I think a good many of the pros and cons were vetted in a single thread at Warren Mosler’s site soon after the first blog post by beowulf appeared focused mainly on the coin. And there’s been an awful lot of discussion of it since then, including a lot of mainstream discussion in the Summer of 2011 and for the past two months.

Second, labeling the coin as “out of left field” is is strange because beowulf is certainly not “left,” but a long-time Republican. His idea is new, that’s all, and it’s about Treasury creating fiat money. Looking at the history of the United States, Treasury has created fiat money from time-to-time under strong Executives. So, why is the PCS proposal to do that again “out of left field”?

And third, what exactly does “freaking out the investment markets” mean. I understand that there will be lot of excitement and maybe some hysteria if the President mints a $60 T coin. But if he uses it only to pay down Government and Fed-held debt immediately and to cover deficit spending, then why would people be overly concerned for too long; especially if the Federal Reserve takes care to assure people, that as Treasury Securities get more scarce, it will be compensating by paying Interest On Reserves (IOR), to provide a continuing vehicle for risk-free investment.

Market confidence isn’t something that is easily shaken, but when it is shaken, the results are disaster. The actual flows in the market only shut down for about a month or so in 2008 before they started to recover, but the job losses were horrific. The impact could have been much worse had the fed not reacted like it did.

“Market confidence” is a slogan that the financial community uses to scare the rest of us. Mostly, it’s just the “confidence fairy.” It was lost in 2008; but there was a concrete reason for its collapse in the collapse of Lehman Brothers and the exposure that created for the rest of the FIRE sector. That is, back in 2008, following on the housing crash, and Lehman’s failure, there was reality behind the reaction to hold on tight and panic.

But, if the President mints a $60 T coin and uses it to pay down nearly 40% of the debt subject to the limit; rendering debt ceiling conflicts immediately a thing of the past; then why should that shake market confidence for more than a few days, if at all? I don’t see the factors that would reinforce any initial irrational psychological reaction to that event. Also, I think that if the financial system is that fragile that we have to postpone implementing direct issuance of money by the Treasury, when we need to have that done to defuse austerity; then that is just another reason for taking the big banks into resolution and rebuilding the whole system from the ground up.

The world is not ergodic, as Paul Davidson points out. There are random features of the world which cannot be foreseen, cannot be accurately forecast, cannot even be put into a probability distribution. Keynes called this uncertainty, as opposed to risk, and Keynes was right.

Stepping out into the world with something which is in every sense revolutionary for our existing monetary system isn’t something to take lightly. Not only that, there are no boundaries or programs in place to constrain the power to directly issue money. As it stands, we’re just making it up without any constraints at all.

Taleb calls these “Black Swans,” and they certainly do exist. But we can’t deal with Black Swans by pursuing all innovations incrementally, or in safe-fail modes. We have to weigh the likely costs of waiting to fully implement an innovation with the explicit costs we’re experiencing without taking advantage of it.

Right now we’ve got 15-16% of the work force wanting full time jobs and unable to get them. We’ve got millions of home owners underwater. We’ve got 55,000 fatalities due to lack of health insurance, since the ACA hasn’t really gone into effect yet, and even after that, we’re likely to still have 35,000 annual fatalities unless we pass Medicare for All. We have a crumbling infrastructure which needs $3 T in new investment and on and on and on. I won’t counsel an incremental introduction of PCS over a period of a decade when the minting of a $60 T coin could free up the whole political system to begin to solve these problems in a matter of months; because of the possibility of a Black Swan that escaped my analysis.

And as far as constraints are concerned, the ones that are important here aren’t constraints on how much can be put into the public purse. They’re constraints on the purse strings. Those constraints are fully in place even with huge PCS face values. Congress still controls appropriations of deficit spending so that no seigniorage can be spent unless Congress appropriates that. The only other spending of seigniorage that would be allowed is repayment of scheduled debt.

Putting together a program where this change is introduced to the market in small increments seems wise to me. I do like the “target” plan you’ve suggested. It’s measurable. We know how much it will be in advance of the program being implemented.

I’ve already critiqued the “target” plan of beowulf’s Mike refers to, in this piece, which is a lengthy evaluation of incrementalism in using PCS. The bottom line is, that incrementalism won’t work, because it will end in likely repeal of the PCS authority.

Many people who trade bonds are severely freaked out by the inflation prospects of QE. Yes, they are dead wrong. They are terribly wrong. But this doesn’t mean we should flip them the bird and shove $60T down their throats, just because we can. It’s possible, but is it wise – even if some parts of our financial overlords are directly responsible for criminal activity?

No one’s suggesting that $60 T should be shoved down their throats. The $60 T proposal is to end debt issuance accompanying deficit spending and use seigniorage instead, and to repay the $16.4 T debt as it falls due, except for the intragovernmental and Fed debt which would be paid immediately. The other $43.6 T would be spent in accordance with Congressional deficit appropriations over 15 – 25 years. Is this a “wise” proposal? Well, I think it’s a lot wiser than one that leaves austerity politics in place for a decade or more, and costs our fellow citizens so much in foregone government financial investment in the public purpose.

Like Bill Black, I am pissed the banksters never got charged with any crimes. They knew. They freakin’ knew. They did bad things. But not everyone did bad things, and I’d argue even most of the finance industry did not do bad things. But this does not excuse the criminals, and there were many criminals.

If you’re so pissed at the banksters then why aren’t you out there doing something about them. There’s an institutional structure out there that nourished the banksters and the fraudsters. At the center of it is the big banks and the Federal Reserve which refuses to regulate them. The Fed needs to be subordinated to the Treasury if this system is going to placed under control. And the first step toward doing that is minting very big coins as part of a process of subordinating monetary policy to fiscal policy.

So we’re here, with a slightly better understanding of how the world of money works. It’s not a perfect understanding, because you see disagreements even among people with a deep level of understanding of the monetary system on our side. But it is better than the current status quo.

So What do we do? First, do no harm.

Pushing the country into another recession because we flip out the repo market by taking away every last safe asset they are using is probably not a good or wise path. Even if this was a good way to strip the bankers of their power – and I don’t agree with it being a good method – it would probably be worse for most people in the United States. There would be many job losses.

Beowulf’s plan to use a series of coins to pay the interest owed at the end of the year is a pretty good one.

The $60 T coin, in itself, does no harm. In fact, it does a lot of good by allowing the political issue of austerity to finally be taken off the table, and allowing the political system to get back to legislating to meet the real issues face. I also don’t think that “flipping out the repo market” will be a problem because IOR means the continued existence of a risk-free, interest-earning place for USD reserves.

That place is at the Fed in reserve accounts. What’s so bad about that, if IOR interest is comparable to bond interest? Why should there be any job losses as a result of this move; and if there are, then the $60 T in the kitty will allow the Federal Government to quickly respond with MMT policies that would have the economy roaring in 3-6 months, in contrast to the economic stagnation we have now.

Finally, the plan to pay interest on the debt using seigniorage isn’t good enough; because it leaves the national debt still in place, even increasing it. So, it leaves austerity politics in place, and fails to create the political background needed for economic legislation that will finally end the Great Recession. That is, it’s a big fail; as are so many attempts at incrementalism.

(Cross-posted from New Economic Perspectives.)